A macroeconomic model of West German unemployment : theory and evidence

The book offers an explanation of unemployment based on a model of wage bargaining between a trade union and an employers' association. The theoretical model emphasizes the importance of distributional fairness in wage negotiations, especially with regard to factor taxation. This is achieved by the application of the proportional solution to the bargaining problem. It is shown, that this solution concept delivers a reasonable model of long run wage determination in which the natural rate of unemployment is independent of productivity growth. Taxes on labour and capital are identified as important determinants of equilibrium employment, the labour tax having a negative, the capital income taxhaving a positive effect. The latter result distinguishes the model from the standard literature. An empirical test using cointegration methods with West German data confirms the theoretical predictions. Keywords: Unemployment ; Hysteresis ; Trade Unions ; Cointegration Contents: Introduction.- Econometric Methods.- Cointegration Analysis; Modeling Seasonality; The Union- Firm Bargain: Bargaining Models; Empirical Tests;The Bargaining Solution: Definitions; The Allocation Set; The Proportional Solution; Why the Proportional Solution?; An Evaluation of Arguments Against the Proportional Solution; Labour Market Models and Wage Dynamics: An Unified Framework; An Empirical Implication; EmpiricalResults; Conclusions; Appendix; A Model of Involuntary Unemployment: The Firm; The Union; The Bargaining Solution; Bargaining as a Theory of the Long Run; The Econometric Model; Appendix; A Macroeconometric Analysis: The Data; Seasonal Structure; Cointegration Analysis; Discussion; Hysteresis: Hysteresis Models; Relation to Previous Studies;Hysteresis in German Unemployment; Conclusions; Index